From an investment standpoint, the past few years have been a period of major transition in the domestic economy. Mining sector investment has come off sharply from a construction-led boom in the early part of the decade, against only a subdued uptrend in investment from the non-mining sectors. This transition has now largely run its course, with mining investment likely to be near its trough, which explains why the Reserve Bank of Australia is forecasting business investment to support economic growth in the coming years.
As it stands | Capital Expenditure
For the moment, late-cycle weakness in the mining sector continues to weigh on business investment. New capex disappointed in Q3 falling by 0.5% in Q3 (market forecast was +1%), with spending on buildings and structures down by 2.8% with a partial offset from equipment, plant and machinery at +2.2%. The detail indicated mining investment was taking a final step lower due to construction on major LNG projects completing, though investment on equipment and plant was on an uptrend. Investment from the non-mining side was moving higher on a gradual trajectory.
The intentions component of the survey according to estimate 4 pointed towards total capex in the 2018/19 financial year of $114.1bn. This was 4.4% higher compared to a year earlier and its strongest uplift since 2011/12. The drag from mining investment was expected to be greatly diminished at just -1.1% over the year, while non-mining firms' investment intentions pointed to a 6.8% increase over the year.
Today, markets look for capex to in Q4 to post a 1% rise. For investment intentions, today we receive the 5th estimate for capex in the 2018/19 financial year, which incorporates 6 months of 'actuals' and 6 months of expectations reported between January and February, and also the 1st estimate for capex in 2019/20.
There are no market medians for these outcomes, however; the history of the survey points to of modest upgrade of around 2% for estimate 5, implying an updated capex estimate for 2018/19 at around $117bn. For estimate 1 in 2019/20 the uncertainties are far greater. For the past 3 years, estimate 1 has come in a little above $80bn. Due to the greatly diminished drag from mining investment, this figure could be somewhat stronger.
What to look for | Capital Expenditure
The result for capex spending in Q4 can be taken as a guide for business investment ahead of next week's GDP growth figures, in particular for the equipment plant and machinery component. It is important to note that these data only cover around 60% of total business investment and excludes a number of major industries, two of which are education and healthcare with the Bureau working towards including these sectors in the survey.
Markets will be more focused on the intentions component of the report as it is a forward-looking indicator for business investment and economic conditions in general. With the growth outlook both domestically and abroad having been lowered due to a wide array of uncertainties in the real economy and in financial markets, it will be interesting to see if this has been incorporated into firms' investment intentions, particularly for 2019/20 at this very early stage.
